Wednesday, December 31, 2008

You're a Mean One, 2008

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Have a Happy New Year and in the spirit of "You're a Mean One, Mr. Grinch" I'll present "You're a Mean One, 2008" (2008 replaces Mr Grinch in all lyrics) - actually this is one mean spirited song when you consider the 'Leave it to Beaver/Donna Reed' type times (1950s) :)



You're a mean one, 2008.
You really are a heel.
You're as cuddly as a cactus,
You're as charming as an eel. 2008.

You're a bad banana
With a greasy black peel.

You're a monster, 2008.
Your heart's an empty hole.
Your brain is full of spiders,
You've got garlic in your soul. 2008.

I wouldn't touch you, with a
thirty-nine-and-a-half foot pole.

You're a vile one, 2008.
You have termites in your smile.
You have all the tender sweetness
Of a seasick crocodile. 2008.

Given the choice between the two of you
I'd take the seasick crocodile.

You're a foul one, 2008.
You're a nasty, wasty skunk.
Your heart is full of unwashed socks
Your soul is full of gunk. 2008.

The three words that best describe you,
are as follows, and I quote: "Stink. Stank. Stunk."

You're a rotter, 2008.
You're the king of sinful sots.
Your heart's a dead tomato splotched
With moldy purple spots, 2008.

Your soul is an appalling dump heap, overflowing
with the most disgraceful assortment of deplorable
rubbish imaginable,
Mangled up in tangled up knots.

You nauseate me, 2008.
With a nauseaus super-naus.
You're a crooked jerky jockey
And you drive a crooked horse. 2008.

You're a three decker sauerkraut and toadstool
sandwich
With arsenic sauce.

Fund My Mutual Fund's Most Popular Posts of 2008

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Readers come and go (hopefully more come than go) over the year, so with 3100 posts (wow!) since we started in August 2007 I thought I'd compile a list of the most popular posts of 2008 for any of you who were not here to celebrate the new year with us nearly 365 days ago. For those that were around back then - thanks for sticking around and suffering through my occasional bad grammar and more than occasional rants (thank gosh for spell checker). Hopefully the content makes up for those shortfalls ;). We've lived through a year people will be talking about in history books for generations.

This is the first time I've looked at my web statistics over such a long period of time (I post the most popular links each week in the right margin of the blog) and it was quite amazing to see we had over 1 million page views in 2008. I've compiled the most popular of these 1 million into some broad categories - economic, stock market, and mutual fund/misc. So feel free to catch up during the coming days in between bowl games if you joined us late this year, and hopefully the new year brings us more growth and readership.

As an aside, I try to put the most pertinent historical posts in the far right margin of the blog so newcomers can "catch up" relatively quick. (I know a lot of people read the blog in readers or via email sent each day, and never come to the site itself, but I'd encourage you to visit the site from time to time and check out the content in the margins - also I update the portfolio each week in the right margin in case you were wondering where that information is)

I am working on a much lengthier "introduction piece" that hopefully will be complete sometime in January 2009, so new(er) readers can sit down and in 1 post see what we've been saying since August 2007, and compare our record to the punditry who muck up most of financial TV and media. I believe our track record, once compiled in one spot, will prove to be exemplary versus the mob that is paraded in most financial media or runs most of the money in this country. As I think about improvements of the website for 2009, I realize what I do is a running daily commentary, sort of like a novel and it's probably difficult to join in on chapter 18 so hence my goal to get some summary posts up early in 2009 so people can catch up on chapters 1-17 in an easily accessible fashion. Or if you prefer....you can read all 3100 posts if you are a masochist ;)

Mutual fund/Misc
  1. Jan 7: Readers Pledges Toward Mutual Fund Launch
  2. May 26: Frequently Asked Questions
Economic
  1. Dec 31, 2007: 13 Outlier 2008 Predictions
  2. Dec 6, 2007: What Should Median Housing Prices be Today?
  3. Nov 19: Boston Globe - What Would a 2009 Depression Look Like?
  4. Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?
  5. Dec 4, 2007: Et Tu 1st Half 2008? Predictions for the Coming 6 Months
  6. Aug 20: Nouriel Roubini "Told You So"
  7. Jan 2: Doug Kass' 20 Predictions for 2008
Stock/Market
  1. May 26: Best Performing Stocks Year to Date (an amazing list considering none of these probably made the end of year list - this was dominated by commodities at the time)
  2. Apr 18: You Thought Visa was the Hottest IPO of 2008? Wrong - Intrepid Potash
  3. Nov 21: Fear Louise Yamada
  4. Apr 14: Holy (Holey?) Crocs! (aka Stuff I've Been Negative on Since Fall 2007)
  5. Dec 6, 2007: Coal Stocks Quietly in Bull Market
  6. Oct 28: Boone Pickens Almost Entirely in Cash; Fidelity Job Cuts; Legg Mason Stock Craters
  7. May 28: Ken Heebner - America's Hottest Investor (boy did that call the top)
  8. Aug 6: Cramer - Quants and their Machines
  9. Apr 22: Don Coxe Offers Coxe Commodity Strategy Fund (another sign of a top)
  10. Sep 10: Time to Bail Out Washington Mutual (WM)?

Sequenom (SQNM) Continues to Pick up Recognition

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Sequenom (SQNM) is one of my favorites in terms of potential (slash) fundamentals - but as with almost all stocks we've been trading around a core position. Yesterday we had a limit order to buy just over $18.50 which hit and now the stock is already back at $20.50. I have a limit order to sell much of it at $21.20 as I wrote yesterday.

Going forward the strategy I employ on a stock like this will be to repeat what I did above: sell the "edge" part of the position in the lower $21s (which was the recent high) and if the stock bursts through that recent high, this should signal a new leg higher so we'll rebuy (somewhere near $22). If it fails at that level (lower $21s), we'll keep repeating what we just did (rebuy the edge position lower and keep trading it) So far so good.

A couple of these stocks have simply been amazing trading vehicles as we sit and churn, churn, churn in the market. I keep repeating, what used to take weeks or months to play out, now happens in hours or days. So you can book a lot of "round trips" and lock in gains - and repeat over and over. Eventually it will be wrong to trade them and the stocks will make sustained moves up, but until the pattern breaks - keep playing the pattern. When the pattern does break, we will have to pay "up" once to get our position back. Specific to SQNM the real growth story is late 2009 to 2011, so valuation today is tricky - much like Obama, it's a lot of potential and hope with a somewhat limited track record but promising beginnings. While I like to hit a lot of doubles and singles, and not strike out much - I also like to have a few potential home runs in the portfolio - this is one of those.

The latest good press is via Justin Ferayorni at Realmoney.com (published in Yahoo Finance so I can reproduce) who specializes in healthcare stocks. If you've been following along the website much of this content is repeated from what I have posted in the past, but I am a "generalist" (I know a bit about every sector) so I like when people who focus on just 1 sector have the same bullishness I do.

********************

Sequenom has been instrumental in developing prenatal genetic analysis and has turned itself into what could be an incredible investment opportunity by doing so. The company's first genetic test determines whether a child has Down's syndrome, a $2 billion market alone in the U.S.

The Down's Opportunity

There may be no single event more joyful and miraculous than the birth of one's child. And while the nine months of anticipation brings all sorts of emotions, anxiety is one of them as expecting parents pray for their child's good health.

Anxiety, science and our wealthy health care system has driven demand for the triple test, which screens for several development abnormalities, the most common of which is Down's syndrome. The triple test is purely a screening tool -- women whose hormone levels are out of the appropriate range are referred to follow up, usually amniocentesis. The advantage of the triple test is its noninvasiveness -- it is merely a blood draw. Its lack of predictive value remains its disadvantage. Yet nearly 3 million triple tests at $600 each are performed in the U.S. each year according to Sequenom, nearly a $2 billion market.

Women deemed high-risk typically receive amniocentesis or CVS (chorionic villus sampling), and together are performed nearly 500,000 times each year in the U.S. Both procedures are invasive -- amnio collects the amniotic fluid, while CVS involves collecting placental tissue. Both procedures carry a risk of miscarriage and infection. These procedures are time-consuming and 2 to 3 times as costly as the triple test. CVS can be performed earlier in the pregnancy but can lead to false positives. Amnio is the most accurate test available today to determine Down's syndrome.

In total, these tests cost the U.S. health care system between $3 billion and $4 billion yearly (roughly $1,000 per baby) to determine whether a fetus has Down's syndrome. Given the drawbacks, the opportunity exists for a less invasive, more accurate test to help expecting parents through their pregnancy.

The Technology

Sequenom's SEQureDx test uses an elegant approach to fetal genetic screening. As it turns out, fetal DNA can be found circulating in the mother's blood. By using a standard blood draw, Sequenom can extract the fetal DNA and use its MassArray technology to determine whether the fetus has Down's syndrome or not. So far, the test has been 100% accurate. To be clear, the test does report "no calls," which as the name suggests do not determine a "yes" or a "no." These tend to be samples without enough genetic material to quantify an answer with high confidence.

This same genetic screening technology used on the same sample will eventually be expanded to test for other genetic disorders such as cystic fibrosis, thalassemia and sickle cell anemia, among many others. Each of these represents a new market opportunity for the SEQureDx platform.

The Stock

The company will unveil data of a larger study in Down's syndrome on Jan. 31, 2009. Not surprisingly, the data are highly anticipated by the investment community. Many investors are waiting on the sidelines to see what the data hold (if there are false negatives or false positives, or other confounding factors). Other investors expect that no matter the data, the stock will exhibit a sell-on-the-news reaction. This conclusion seems reasonable with a priori logic: If the company already reported 100% accuracy, how can it get any better? That is, the news will necessarily be as expected or worse than expected.

From my perch, I cannot blame any investor for waiting to see more data. Let's face it -- the data we have so far are from a relatively small set of patients. The question in my mind is, are more investors with more capital waiting for the data point to get a chance at an entry point (barring an outcome that puts the test at a disadvantage to currently available tests), or are there more "flippers" waiting for some great news to get out?

I tend to believe the former (of course with that large caveat on the data standing on their own), and I have put my money where my mouth is. But let's look beyond this data point and view the opportunity.

In my opinion, the opportunity is best examined through the eyes of a pregnant woman. While many investors point to amniocentesis as the appropriate market size, I believe a successful SEQureDx test will become the de facto screening test, as it is far more accurate than the current triple test. As with any test, I do not expect it to prove 100% accurate as the testing experience increases, but that will not be an impediment so long as this test is superior, cost-effective, and noninvasive when compared to current standard of care.

The hook for women is simple: noninvasive, more accurate. This test could truly revolutionize the screening practice, and the increased sense of confidence will encourage its use. Women will request this test if the data continue to stand the test of time, and doctors will not resist, as science would prevail in the courtroom if they guided incorrectly. I can imagine this test being discussed on Oprah and The Today Show and seen in women's magazines. If the data stand, resistance is futile.

So what is all this testing worth? Three million tests a year at $700 a test nets more than $2 billion in revenue in the U.S. alone. With only 15% cost of goods and only requiring a relatively small sales force, Sequenom should carry 60% operating margins. That works out to $720 million in after-tax profits per year, or more than $11 a share. A reasonable 20 multiple on the U.S. business alone yields a $200 stock in time.

Outrageous? It sure seems like it. But the key to me is the stock's asymmetry. I think the upside opportunity vastly exceeds the downside risk at this point in the company's development. If this test is only able to capture the U.S. amnio market, it would yield roughly $2 per share for the company.

[Dec 18: Sequenom in Investors Business Daily]
[Oct 30: Sequenom Misses But We Don't Really Care]
[Oct 7: Sequenom Down 8% on "Competition" Threat]
[Sep 23: Sequenom - All Systems Go on Down Syndrome's Test]
[Aug 13: Beginning Stake in Sequenom]

Long Sequenom in fund and personal account

Bookkeeping: Taking Some More Profits on the "Mark Up Rally"

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The institutions did a great job of marking this market up into the year end - we put nearly 4% on in the past day and a half. If the 3 PM shenanigans return they might even be able to tack on more and as I stated this weekend mark the market up >5% to get it to 920 on Dec 31st at 4 PM. I wrote in this weekend's summary

Now if I were a cynic, I'd still cling to my year end "mark up" theory - that is hedge funds using the last few days to push the market up to make their books look a lot better than they are.

So within a range of 850 to 920 we're at the lower end and a nice 3 days push of 5% on the S&P would take us to the top of the range - have us close at/near the high of the past two months, we can talk about "great strength to close the year", "January small cap effect", "mustard seeds", "the government will take away most of our ills" and "President Elect Midas is coming". But only a cynic would believe the market could be manipulated like that and clearly we don't see abhorrent behavior like this in the casino. It would be much too obvious....

This is the type of garbage that showcases why I am cynical about everything to do with this "efficient market". Folks, the longer you are around the market day in and day out the more you see how much of a Wild Wild West (with no sheriff/regulator) it is. I mean, this one was obvious - the institutions play the "mark up game" going into every quarter end - everyone just sort of winks about it; even the CNBC folks just chuckle. So of course in the worst year in decades the odds are high they are going to play the "mark up" game going into the last few days of the year. Then we can all feel somewhat less worse about the horrid performance numbers most of these guys put up in 2009. Somehow even I can see this game and predict it ahead of time, but our regulators do not... but it's the casino and the casino owners make sure the regulators have little power.

So let's clap and cheer and watch the 3 PM jump the shark moment - why not, one more to finish the year? I'm going to continue to be a doubter - basically faith in Ben Bernanke and Obama are all the bulls really have. Yesterday the government gave money to GMAC and GMAC promptly went out and is giving 0% 5 year car loans to people with subprime credit. That's the ticket! Sadly that is the how we are planning to revive this economy - return to the ways that got us here in the first place. But this time around the Federal Reserve will be buying those bad loans and we'll take the hit as taxpayers - both on the front end (giving our tax dollars away so companies can make bad loans) and back end (when we take in these bad loans so that the Fed can "stimulate" credit markets - remember they are going to buy some hundreds of billions of car loans, student loans, and the like as they print free money for everyone). Capitalism!

If we close above S&P 920 for a few days after the retail report next Thursday and employment report Friday and shrug off everything due to the best inauguration speech ever coming on the 20th I'll reconsider and add more long exposure. I actually feel sorry for Obama - the expectations on this guy are so enormous; by next summer when all the dreams of the nation are not fulfilled he might get a backlash. That would be unfair but right now he is expected to part the seas.

Some transactions today...

(A) Emergent BioSolutions (EBS) continues to give us trade after trade - the gift that keeps on giving. We added to it Monday when it fell to the 20 day moving average (we added in the $23.50s) I wrote

Increasing EBS exposure from 2.3% to a 3.4% stake, adding in the $23.50s. These replace the shares sold on Dec 22nd at $26.16; or a 10% reduction in cost base in a week on this batch of shares. Again, I'd like to stress there could be trouble ahead due to the failure to break through $26.

So I am just repeating the exact same trade I did previously - selling in the $26s, with hopes to buy lower. Or if the stock finally breaks clear of $26 a new "leg" of gains should be ahead of us and I'll pay up to get our position size back. For now I dropped this from a 3.7% stake to 2.3% with sales in the $26.10s. This stock has been perfect with a core (always keep a core) and edge (trade the edge) strategy. We're booking a two day, 11% gain in the "edge". So once more the 20 day moving average has moved up to $24 - I'd like to be a buyer there or if the stock gets to $27 or so... EBS has stalled out at 26ish about 8 times the past month so until proven otherwise that is the ceiling and I'll let go exposure each time we hit our head there.

(B) Life Partner Holdings (LPHI) is one of those "stocking stuffers" that a couple mutual funds must be buying today to show their investors "look how smart we are - ignore those 40% losses in your 401k statement! We've held the best stocks all quarter - trust us!" At 11:30 Am or so it took off in a 45 degree angle and its jumped from $41.00 to $43.70s. This is one name I have never owned enough of, but I am going to sell off most of my remaining holdings into what I perceive to be window dressing - the 20 day moving average is down at $37 (where I'd like to buy more) so it's quite a ways away from any support after today's move. I'm going to cut this from a 0.8% stake to 0.1% with sales in the $43.70s - one of the best charts out there and again, my main mistake here is not owning enough.

(C) I am cutting Mosaic (MOS) by two thirds going into earnings next Monday. I expect the phosphates business to continue to be weak and Potash (POT) even warned on the potash side of the business; that said it could all be priced into the stock. Mosaic is sitting right under its 50 day moving average (low $35s) so we're exiting in the $34.90s. We're reducing it from a 1.7% stake to 0.7%. I'd like to see this name cross over recent highs and get to about $40 to have conviction that its ready to be anything more than a trade. For newer readers I do not play the "earnings game" (pile into a stock ahead of earnings, pull the slot machine arm and hope I get a "beat!")

To offset this I added to iShares Xinhau China 25 (FXI) and Jacobs Engineering (JEC) - both these have held support and as we said in this weekend's round up, we were willing to jump back in if they did so. We cut both back last week as they tested support - now they have held, so we're willing to get some of our exposure back.

Long all names mentioned in fund; long FXI/JEC in personal account

Bookkeeping: Tax Loss Selling in ReneSola (SOL) and Life Sciences Research (LSR)

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Well unlike most mutual funds and institutions if you invested in this (future) mutual fund you will see what I do every week. So unlike "them", many of which are stuffing their portfolios with the best performers of the quarter or year as we speak (we call it window dressing), so they can say to you "yes I somehow lost 40% this year but look I've owned best performer ABC and best performer XYZ all quarter!" you can see the wins and losses in near real time.

I am going to book two positions for year end tax considerations to offset gains (although many mutual funds have a year end of Oct 31s not Dec 31st) - one in solar and one in contract research organizations.

While I have 40 or so positions I really have far less; I buy mini baskets in a lot of sectors - that is 2-3 stocks from the same sector so I curtail company specific risk... i.e. if I want a 6% exposure to coal, I bought 3 coal stocks, or 7% exposure to solar, I bought 3 solar stocks, etc. That way if one blows up I don't take the full hit on the entire sector exposure.

(A) Solar has been one of our worst performing "bets"... I predicted a lot of consolidation in this space as it is a commodity but I thought it would come later - 2010/2011. It seems to be coming much sooner than I anticipated and I expect 2009 to be a rough one for solar [BusinessWeek: Clouds Over Solar Sector] I honestly fear for the viability of some of these names - keep in mind for every 1 public company listed in the US there are 10 counterparts (usually of smaller ilk) operating in China or Hong Kong - many of those shall perish. The credit contraction and drop in oil from $140 to $40 has destroyed this sector - I was hoping Obamamania would drive up these stocks but aside from yesterday and election day there has been nothing. With that said, what I talked about above (business issues) are facts, and you know when Obama comes out with his energy policy and specifics the lemmings will drive up solar stocks at some point. So I want to have some exposure for those moments. Ironically the Chinese stocks have reacted better to Obama then the American stocks, but the only reason that is... is there are no facts on the Obama energy policy and its just speculation driven gambling by investors - and the Chinese stocks have the lowest prices and thus are the easiest for daytraders to run up. It's all about thesis, not facts.

I have 3 stocks in the space and am going to jettison ReneSola (SOL) which is incredibly reliant on JA Solar (JASO) - who in and of itself has announced a series of somewhat frightening news releases the past 3-4 months. LDK Solar (LDK) faces the same issues, but I just booked a 30% gain in SOL yesterday (offsetting some losses) so it's the easier candidate to cut at this moment. Trina Solar (TSL) is my 3rd stock, and I want to keep it on my sheets to remind me each day to stay humble and even guys with great blogs make stupid stock decisions ;) Trina is my biggest loss and has lost us 4% of return just in this 1 name - so I want to stare at it each day when I look at my account to remind me I should of used discipline and cut my losses earlier when I had a chance.

I restarted ReneSola (SOL) in August [Aug 12: Some Adjustments to Solar Patch & New Position in ReneSola (SOL)] in the mid teens; we actually booked some serious gains on this name after a great earnings report [Aug 19: ReneSolar - the Sun Shines On] but it's been all downhill from there. The stock fell from $15s to near $2! Thats a 87% drop - it has since "rebounded" with yesterdays huge spike to near $5. Thankfully we had booked those early gains and did not have a huge exposure (position size) on the way down (we did not catch the knife). Again when Obama says anything about solar this type of name could double overnight but I'm not a speculator, I'm actually one of the remaining few who like to invest. And we have other names in the sector when Obama time comes.

We were able to offload 75% of our position yesterday just under $5 and the remaining 25% today in the $4.60s. Even with the huge move we still took a $10K loss but considering the stock is still down 70% from where we entered the position I am fine with that. As I wrote yesterday, I added back some of this solar sector exposure into LDK Solar (LDK) since it did not jump yesterday, but I have little to no conviction based on "business" - again I am very worried about solar stocks in 2009. This is all about sentiment. I do still believe in solar as a long term trend but much like microchips I expect it to be a very vicious business with a lot of cannibalization.

(B) I also own 3 healthcare contract research organizations. This is the one area of healthcare that has failed me [Oct 28: Contract Research Organizations Taken to the Woodshed] - ICON (ICLR), Kendle (KNDL), and Life Sciences Research (LSR) was our "basket". ICLR is best of breed but the stock has been in free fall for months, Kendle we've actually made some money on due to some well timed trades and LSR is the smallest of the bunch and we've never had a chance to even make a nice trade or two - it's been straight down since we've owned it. The fear here are twofold (a) as credit dries up a lot of smaller biotech type of companies will go out of business and (b) the larger drug companies will be conserving cash in this credit deficient world. For the US based CROs the other fear is a stronger dollar hurts earnings - which is a problem for all US multinationals who have been goosing earnings the past 7 years with the awful dollar.

I created a basket of these names in August [Aug 13: Creating a Basket of CROs] and LSR was began around $33. The stock is now around $10 but more troubling the past 6 weeks, while the market rebounded the stock has been in a narrow range of $8 to $10... no real rebound. It is building a huge base - from which a very large move shall commence. If that move is up or down I don't know; but if its up we can jump in at a later date. I am selling the 1.2% stake we still have for a $16K loss.

I am keeping Kendle due to the relative strength - in a group that is now much hated its been the best performer; and ICON is ironically Irish so the strong dollar concerns should not be an issue - but the chart is saying something is amiss; so I'm keeping it but not in large exposure.

This brings us down to 37 total positions but again much of these are ETFs to hedge on downside (or upside), some are cash ETFs, and some sectors we own multiple names in a basket - I want to be lean, mean and in the green in 2009 in what I expect to be another extremely volatile year where trading dominates over "buy and hold". The less positions to manage, the easier.

Sorry, no charts today - will add them to this entry later.

Long Trina Solar, LDK Solar, ICON, Kendle International in fund; long LDK Solar in personal account

Tuesday, December 30, 2008

Bookkeeping: Cutting ReneSola (SOL); Adding to LDK Solar (LDK)

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ReneSola (SOL) has gone from up 14% to up 30% since I posted about Obama's speechwriters about 75 minutes ago. The stock is now hitting resistance near $5 and I'm not going to look a gift horse in the mouth.

The stock has jumped from 1.7% of the portfolio to 2.4% just from today's appreciation so I'm going to exit 75% of the position selling in the $4.80s with a shout out to President Elect Midas (anything he touches turns to gold) - also a thanks to his speechwriters. We're selling just under $4.90; 3000 of the 4000 shares we had. This will take us down to a 0.6% exposure. We are still sitting on some fat losses in all these solar names but less than yesterday.

I am being conservative here, and what I've noticed with solar stocks since I've gotten into them in 2006 is they lose money 90% of the time but in the 10% of the time they run, the speculators can make them double or triple in a few days or at most weeks. So a $5 SOL can be a $15 SOL by Jan 5th. But unlike the folks who play these stocks, I am not a riverboat gambler and I'm happy to take this appreciation and lock it in.

However, knowing the gamblers are around I am going to replace the SOL exposure with LDK Solar (LDK) which is only up 6%. Tomorrow they can run up LDK Solar which is in the $13s and main resistance is just over $16. This can be done in 1 hour if Obama says "solar" anytime in the next 24 hours. Folks, that sounds facetious but it is not - infrastructure was a well known Obama idea but until he literally said it on Meet the Press all of Wall Street was apparently ignorant Obama liked infrastructure.

I doubled the LDK Solar stake from 1.4% to 2.8% with purchases in the $13.40s. So if Obama touches LDK Solar on the forehead tomorrow we have another win; if not - we kept the same solar exposure but locked in some big gains with SOL.


p.s. folks, we are still on track for the hedgie push to 'mark up' this market to S&P 920 by tomorrow at 4 PM. Push... push... push... the last few weeks of a blind SEC are upon us. Adult supervision might actually arrive in late January. The casino is threatened....

I am now coming to belief the stock market might be up 20% on Jan 20th; every 3-5 minute increment of "the speech" the market shall rise 1%. Remember, unlike the State of the Union which happens at night this will be mid day. You cannot stop his oratory; you can only hope to contain it.

Long ReneSola, LDK Solar in fund; long LDK Solar in personal account

American Science & Engineering (ASEI) - Very Promising

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Speaking of solid defense type companies with heavy reliance on the most lucrative customer ever know to man (the U.S. federal government) we have a stock which has had a very nice year - American Science & Engineering (ASEI).

American Science and Engineering, Inc. (AS&E) is the leading worldwide supplier of innovative X-ray inspection systems. With 50 years of experience in developing advanced X-ray security systems, the Companys product line utilizes a combination of technologies, including patented Z Backscatter technology, Radioactive Threat Detection (RTD), high energy transmission and dual energy transmission X-ray. These technologies offer superior X-ray threat detection for plastic explosives, plastic weapons, liquid explosives, dirty bombs and nuclear devices. AS&Es complete range of products include cargo inspection systems for port and border security, baggage screening systems for facility and aviation security, and personnel and passenger screening systems. AS&E systems protect high-threat facilities and help combat terrorism and trade fraud, drug smuggling, weapon smuggling, and illegal immigration and people smuggling. AS&E customers include leading government agencies, border authorities, military bases, airports and corporations worldwide, including the U.S. Department of Homeland Security (DHS), U.S. Department of Defense (DoD), U.S. Customs and Border Protection (CBP), North Atlantic Treaty Organization (NATO), HM Revenue & Customs (U.K.), Hong Kong Customs, and Abu Dhabi Customs. For more information on AS&E products and technologies, please visit www.as-e.com.


I almost bought this yesterday as the stock has pulled back to its 50 day moving average, and tested it intraday for a week straight. Today, it seems to have bounced off it nicely and could be setting up for a new run...

Readers have pointed this stock out to me in the past, but I have not had a lot of time to really delve into the name. Analysts have estimates of $3.10 for the year ending March 2009 and $3.55 for March 2010 so it also is in that range of 20x forward earnings. This is a nice smaller sized ($600M market cap) defense oriented name which reported a very solid quarter, has very little debt, even spits off dividends, and once again - that customer base. 30% of sales are also recurring for maintenance of systems which is a big bonus.
  • The Company reported record revenues of $56,293,000 as compared with revenues of $37,627,000 for the second quarter of fiscal year 2008, net income of $7,361,000 as compared with net income of $4,515,000 for the second quarter of fiscal year 2008, and earnings per share of $0.83 as compared with earnings per share of $0.48 for the second quarter of fiscal year 2008. This represents a 50% increase in revenues and a $0.35 increase in earnings per share when compared to the second quarter of the prior fiscal year.
  • The Company reported $93.5 million in bookings for the second quarter of fiscal year 2009 versus $55.6 million in the second quarter of the prior fiscal year.
  • Backlog at September 30, 2008 increased 61% to a record $197 million as compared to the prior year.
  • Bookings for the quarter increased 68% with $93.5 million in new orders reflecting the continued strength of our Z Backscatter Van (ZBV) for force protection, counter-drug and anti-terrorism applications, Fabiano said. Additionally, the on-going focus on international markets resulted in robust ZBV bookings for emerging sales territories. AS&Es proprietary Z Backscatter continues to achieve market recognition as a premier technology to detect explosives, drugs and other contraband. Moreover, our Field Service business reported record bookings, reflecting our increased installed base and high level of customer satisfaction.
  • In accordance with the previously announced dividend program, the Company is declaring a quarterly cash dividend of $0.20 per share, payable on December 4, 2008 to the holders of record at the close of business on November 17, 2008.
Here is a recent blurb from Investors Business Daily
  • U.S. Customs and Border Protection announced in October that it had installed American Science & Engineering's (NasdaqGS:ASEI - News) Z-Portal vehicle screening system at the San Ysidro checkpoint.
  • The Billerica, Mass., company specializes in X-ray inspection systems that promote border security, fight terrorism, and combat drug and weapons smuggling, illegal immigration and trade fraud. Its systems are used by governments and corporations around the world.
  • The portal is the only multiview, drive-through screening system available to scan cars, vans and their cargo for concealed threats and contraband. It uses the Z Backscatter technology that American Science has built its business around, protected by more than 20 patents. The Z-Portal's technology delivers a much clearer image of low-density objects that may be hidden in car fenders, tires, trunks and gas tanks, or under the hood. It emits extremely low dosages of radiation, making it safe for operators, drivers and the environment.
  • "The international community has spent more than the U.S. on port and border security," said Brian Ruttenbur, an analyst at Morgan Keegan. "However, we are starting to see a shift in focus away from airport passenger screening to detection of cargo at ports and borders."
  • Customs and Border Protection will study how the first portal system performs at San Ysidro, but the agency already expects more to be deployed in the future because they make the process more efficient and effective. "This apparent approval opens the door to additional orders for Z-Portal systems that carry ticket prices that are believed to be in excess of $2 million," said Stifel Nicolaus analyst Stephen Levenson. The U.S. has roughly 60 border crossings with Canada and nearly 40 along the border with Mexico. This presents the potential for deployment of several hundred Z-Portals domestically over a multiyear period, Levenson says.
  • American Science's Z Backscatter technology reveals items that traditional X-rays cannot, attracting an elite class of clientele that includes the Department of Defense, Homeland Security and customs, as well as other federal agencies and foreign governments.
  • The company also makes smaller systems that screen people entering airports and government buildings. In 2007, American Science's SmartCheck personnel screening system was awarded a $10.8 million contract by the Transportation Security Administration.
  • American Science's screening systems require servicing, which provides the company with a recurring revenue stream. That stream accounts for about 30% of total sales. Inspection systems generate 67% of sales, while contract research and development and parcel products make up the rest.
  • "If you listen to the president-elect, homeland security spending will be a high priority, and defense spending won't change significantly for the next couple of years," Ruttenbur said. (President Elect Midas will not want to be seen weak on homeland defense - he has an election to win in 4 years)
No position but very interested

Another Upgrade for Axsys Technologies (AXYS); Sticking with AeroVironment (AVAV) Instead

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I'm keeping this name on the radar as I like both defense and healthcare as sectors for 2009, but it's been trading like a Chinese small cap (or US financial) the past few weeks; crazy volatility. Axsys received the second upgrade in two weeks today [Dec 23: Axsys Technologies Upgrade]
  • Shares of Axsys Technologies Inc. climbed Tuesday after a Morgan Joseph analyst upgraded the stock, saying it has been oversold -- and the company has "indicated that its business is operating smoothly" despite the economic crisis.
  • "We visited clients with management last month, and during those meetings, it was reiterated that pricing and volumes have not been affected by weak general economic conditions," wrote Morgan Joseph analyst Michael French in a note to investors. He upgraded the stock to "Buy" from "Hold," with a target price of $64.
  • French said the company's shares have been weak since an analyst downgraded them based on valuation. Earlier this month, a JPMorgan analyst downgraded Axsys to "Underweight" from "Neutral," saying the stock is priced at too high a premium to its rivals.
I like this name for the relative security of its revenue stream (heavy dependence on federal government) but the volatility is simply too wicked of late. Technically, one could make a relatively shaky case that the stock is forming a double bottom (with mid October lows)

As I said last week, I am going to err on the side of caution and we'll focus on better charts - for AXYS we'd want to see the stock clear back north of the 50 and 200 day moving averages which are converging in the mid $50s. Frankly until proven otherwise this is the type of chart I'd short as it rallied back to resistence ($56-$57)- until proven it has real legs. The other issue is valuation - even at these prices the stock already trades at nearly 20x 2009 estimates. After last week's upgrade, and large 1 day bump, the stock gave back all its gains immediately - not a sign of strength in these eyes.

Instead I added a touch to AeroVironment (AVAV) yesterday as the stock bounced beautifully off the 50 day moving average... so I can play the same theme with a much better chart.

Long AeroVironment in fund and personal account

Obama Speechwriter in Hawaii lets slip Use of "Solar" over 7 times

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Solar stocks are now finally running on President Elect Midas' use of "Solar" multiple times in Inauguration speech. Details must be leaking out from Hawaii HQ. Finally people are waking up to yet another of the Obama thesis; hopefully these can keep running right until Jan 20th so I can get rid of them at higher prices to "thesis buyers". We are so very underwater in these capital sucking equities.

TSL +11%
SOL +14%
JASO +15%

Come on LDK. 3%?? It's Obama time! 40 acres, a mule, a bridge, a 4% no doc, no appraisal mortgage, and a solar panel for every American. Thesis baby - thesis.

Update 3:30 PM - TSL and SOL both up nearly 30% now...speechwriter must of added a few more solar references in the past hour.

Long TSL, SOL, LDK in fund; long SOL in personal account

A-Power Energy (APWR) Warns on Fourth Quarter

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A-Power Energy (APWR) is out with a heck of a pre-announcement this morning and the stock tanked. Luckily we sold almost our entire position out as it hit resistance near $6 just over a week ago BUT we began rebuilding the position (and it was up to 2% of the portfolio) going into today. [Dec 22: Bookeeping - Beginning to Rebuild A-Power Energy] At the time I wrote

I actually cut even more as the stock failed $6 and we went into the week down to a 0.8% stake. The stock is down 11% today alone so we'll begin to redeploy back into the name, but allowing for a move back to the upper $3s/low $4s if the market returns to reality in the coming weeks. I will continue to trade this wide range (upper $3s to 50 day moving average, currently $6ish) until the stock proves it is ready to make a move above resistance.

So as you can see by the chart, despite the warning the stock held its $3s range on the bottom side - at which point as I said above I'll be buying.

However, this news gives me pause.
  • For the 2008 fourth quarter, the Company now expects revenue to be approximately $76 million and net income to be approximately $5 million. Both revenue and net income guidance are now lower than previous guidance of $158 million and $15.5 million, respectively.
  • Mr. Jinxiang Lu, A-Power's Chairman and CEO, commented, "Due to the unusual current macro economic conditions, a few of our key potential contracts, which we expected to close in the fourth quarter, were postponed.
  • As our projects are highly capital intensive, we always require a sizeable down payment as a key component of our standard contract. Under today's environment, we believe that it is even more important to exercise prudence on customers' payment terms and to continue to focus on our cash flow management.
  • Entering into 2009, we remain confident with a positive outlook for China's wind energy market as both government and enterprises have a strong commitment for renewable energy development, and we maintain a leading position in the marketplace, where the barrier to enter is high. As a result, we continue to expect profitable growth in 2009."
I'm going into 2009 assuming every stock I own is going to miss earnings by 50% and then seeing if the stock is still "cheap" based on that assumption. Even if APWR misses current 2009 estimates ($1.60s) by 50% it will still be cheap. However, I was taken aback by the scope of today's announcement. Their non wind business customer base is highly concentrated in China which in theory is in a relatively closed financial system, and thus should not be so exposed to the global credit contagion. But it appears from the wording in the document today that this is not the case. (which would add to my speculation that China is going to surprise investors materially to the downside in 2009)

Further, their non wind business is backloaded into certain quarters (this being one of them) and the "miss" is over 50% on revenue & nearly 70% on net income. They say the contracts are 'postponed' but as we've seen in other companies, postponed can turned into 'cancelled' quite easily, especially in this environment. Again, the fact that their non wind customer base is mostly Chinese and even there they are seeing this sort of credit/macro economic issue is even more surprising than if it was a bunch of European or American contracts being "postponed".

For aggressive investors purchasing in the $3s still makes sense; the issues are more about upside. With such a cloudy outlook and lack of track record over the long run, it is hard to have confidence that these contracts are only postponed for a quarter or two. More importantly from a portfolio management point of view we have been focusing on more secure revenue streams in what we believe will be a rocky 2009 with credit conditions perhaps improving but still remaining tight. We want to have visibility in 2009 in as many companies as possible, not guesswork. Right now APWR has officially become speculative guesswork. Obviously at this low valuation a lot of the risk is already in the stock price, but right now I have zero clue what 2009 estimates will be and hence have a hard time putting a valuation on the name. So instead of adding to the position I am going to take the conservative route and just sit with what I have. Again, aggressive speculators/traders would take a different tact than I am - buying here in the upper $3s and flipping out in mid $4s to low $5s.

I'll wait for the next earnings report conference call to see if they can provide better clarity on 2009. So we're down on this last batch of purchases but thankfully had locked in a large amount of sales in the $5.90s when the position was much larger. On the plus side the company has a solid cash base and no debt so it's not an issue of solvency. There are just easier places to fish right now.

Long A-Power Energy in fund and personal account

Bookkeeping: Adding to Sequenom (SQNM)

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In this weekend's summary I listed 4 names in the category of "best charts I wanted to buy on pullbacks"; yesterday Emergent BioSolutions (EBS) fell to our trigger level and this morning Sequenom (SQNM) fell to our trigger level.

I had cut this name back on the 18th [Dec 18: Bookkeeping - Cutting Sequenom] after making 30% in 5 days

Sequenom (SQNM) which we love fundamentally (see earlier post today) is now at it's early November peak - we will assume it stalls here and creates a double top (from which it would fall). If I'm right, we'll rebuy at a lower price; if I'm wrong (which never happens) we'll rebuy at a higher price.


I am cutting Sequenom (SQNM) down from a 2.1% stake to 0.5% stake, with sales in the $20.70s.

The assumption we made on the 18th of a double top forming was accurate and since then the stock has pulled back smartly. I put in a limit order, just over the 50 day moving average ($18.50) which triggered this morning (looks like the stock actually fell briefly into the upper $17s in fact). Good enough, we were able to rebuy the stake we sold less than two weeks ago in the $20.70s, in the $18.50s. (roughly a 11% lower cost basis) In calmer markets this "core and edge" strategy works very well - as a bevy of trades the past 5-6 weeks have worked to perfection.

We added to our core position of 0.5% and now are back up to a 2.6% stake. The stock has already rebounded to the upper $19s by early this afternoon. If only they all worked out like this....

Going forward the strategy I employ on a stock like this will be to repeat what I did above: sell the "edge" part of the position in the lower $21s (which was the recent high) and if the stock bursts through that recent high, this should signal a new leg higher so we'll rebuy (somewhere near $22). If it fails at that level (lower $21s), we'll keep repeating what we just did (rebuy the edge position lower and keep trading it) So far so good.

[Dec 18: Sequenom in Investors Business Daily]
[Oct 30: Sequenom Misses But We Don't Really Care]
[Oct 7: Sequenom Down 8% on "Competition" Threat]
[Sep 23: Sequenom - All Systems Go on Down Syndrome's Test]
[Aug 13: Beginning Stake in Sequenom]

Long Sequenom, Emergent BioSolutions in fund and personal account

Monday, December 29, 2008

What Happens if America Returns to a Historical Savings Rate?

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A lot of the focus of the punditry is when we'll recover - personally I think it's a bit of a moot point. What I'm thinking through is not when, but what the recovery will be in America. I posted many of my thoughts in [The US Economic "Recovery"] but essentially a lot of cross currents are forming which should make for a very interesting 5, 10, and indeed 20 years ahead.

Much of the current recovery thesis is based on (a) government spending replacing private enterprise and (b) coaxing Americans back to their old habits. But I'd like to ask what are "old habits?" - most of us in our 20s, 30s and 40s know one reality; our context of history is very different than one who has a longer precedent to view. So let's take a few steps back and I will give you some insight on why I think we're not going to be going back to the binge we've just left for a long time. And why I appear to be so negative on any near term "recovery" - relative to reaching anywhere near the potential of the economy. No we won't be at a -5% GDP figure quarter after quarter for years on end... but what will the "recovered" America look like?

There are many global structural changes happening slowly but surely [Do the Bottom 80% of Americans Stand a Chance?] which I believe will bring the standard of living (and wages) into more of an equilibrium across developed and developing countries. For humankind that is a net positive since many on the globe live in stark poverty - much of it based on nothing more than what mother they are born to, and in what country. But for those at the top of the totem pole, it will mean a harsh readjustment downward for many within the society. I believe this is not a prediction; that in fact it has started in the lower rungs of society and it's been working up the food chain to the middle class. I won't go into my long term predictions for the country but I believe we will be "forced" into a more European model as jobs security is in a constant state of threat as capital floods to the lower cost countries - safety nets, healthcare, higher taxes; it has to happen here eventually because many more pieces of our society will be subject to the forces of globalization (both good and bad) and demand protection to protect our living standard. This is a lot bigger than a "recession" - the recession is a symptom of the national disease.

Median wages have not increased (adjusted for inflation) this decade; and the stratification of wealth has become more concentrated in the top % than any time since the 1920s. Political dogma has thus far allowed this to happen as the citizenry has been busy pointing fingers at each other, rather than looking at why these things are really happening. While the reasons could be debated, the facts are the facts. I believe the past decade many in the country have been compensating for their lack of wage growth with leverage (borrowing). The house ATM was just the apex of a credit bubble that has been building for a long time and obviously peaked in the middle of this decade.

I'd like to present the graph below which shows the historical saving rate of Americans since the 1960s. (click to enlarge)


As you can see, Americans used to save. They used to act quite near our European and Asian friends

People keep asking when Americans will go back to their old ways, as if saving 0% or 2% is our old ways. Not really - that's our most recent ways. But let's peel back the onion.

In the 1960s, Americans typically saved in the 7.5% to 10% range. A bit below where Germany has been the past 15 years.
In the 1970s, Americans typically saved in the 8.0% to 12% range. A bit below where France has been the past 15 years.

Then something changed in the mid 1980s - call it culture, call it entitlement, call it lack of financial literacy - call it what you may. The reasons are immaterial for our purposes - we just care about the raw numbers. After being over 8% for just about all of the 1960s and 1970s, the savings rate has never hit that level since 1987.

Between 1987 and 1993, Americans typically saved in the 6% to 8% range.
Between 1994 and 2000, Americans typically saved in the 4% to 6% range.

Uncle Alan Greenspan's "easy money" policies (year 2k baby!), 9/11 easy money policies, 0% financing for cars, furniture, deregulation of financial institutions, crazy mortgage - all that marked 2001 onward. The above mentioned stagnation of median wages (inflation adjusted) for many in the bottom 2/3rds of the country also was a trademark of this decade. Jobs that were not outsourced could be "threatened" with such, wresting power away from workers - and inflation began to soar in health, tuition, all the normal culprits.

Our saving rate plummeted to 0-2% for much of the decade, famously dropping to a negative rate at the peak of the housing boom in 2006. Literally we spent more than we had as a nation of individuals.

Didn't globalization and wage pressures affect Europe just as much? Why did their savings rate not plummet just the same to compensate? In my opinion, part is culture (Germany/France versus UK) and part of it is workers protections. In the "socialistic countries" (the ones not recently named U.S.A.R) worker protections and unionism are high. It is very hard to fire, so companies are reluctant many times to hire. But once your "in" you're gold - sort of like public school systems and the teacher unions. So wage pressure is lower - contrast that to the more open UK which has modeled itself after the US (while retaining safety social nets/healthcare for all that the US lacks) - its saving rate has also plummeted and corporations tend to run more free with the ability to hire/fire much more readily than those countries on the mainland. That's part of the "flexibility" the dogma tells us is necessary to "react to globalization". Now the interesting case study that supports my theory is Japan - they used to be very high savers with solid worker protections. But now they also have embarked on U.S. style worker rights where humans are commodities. I won't pretend to be a Japan expert but the more I have been reading the past half year the more I see they have adopted a lot of principles that make their corporations "flexible" over the past decade - i.e. huge influx of temporary workers, birth of a generation of working poor - i.e. similar to our service industry, huge growth in the income gap, pulling back benefits, et al. As we saw in [Oct 28: Pooring of Japan Too?]
  • The 29-year-old laborer is one of a burgeoning class in Japan -- the working poor. The number of Japanese earning less than $19,610 a year surged 40 percent from 2002 to 2006, the latest data available, the government says. They now number more than 10 million.
  • "It is unprecedented to see such a widening income gap in Japan," said Yoshio Sasajima, economist at Meiji Gakuin University in Tokyo. "Our society is definitely becoming a class society."
  • In the 2000s, that was followed by a round of free market reforms that widened the disparity between haves and have-nots. (sounds vaguely familiar)
  • A key to the growth of the working poor has been the explosion in temporary employment agencies, which allow corporations to take on labor without having to pay benefits -- and then unload workers at will. (sounds vaguely familiar) "Instead of hiring costly, full-time employees, companies are bringing in cheaper, part-time workers as part of their cost-cutting efforts," said Yasuyuki Iida, an economist at Komazawa University in Tokyo.
So as these "reforms" have taken hold in Japan (strengthen corporation, weaken worker) the saving rate has plummeted from 12% to 6%, and now from 6% to 2%. People try to maintain "old lifestyle" with "new compensation" which is less than old compensation (inflation adjusted) - hence savings deplete. Those are my theories, and of course they can be argued. Eventually I think as more U.S. workers become disenfranchised and lack of stability engulfs the working class as they compete with wage earners in developing countries, a major backlash will happen in this country and indeed others that have adopted the "dog eat dog" capitalism structure. Perhaps it's fruitless for workers, and most corporations will move plants to locales were labor is cheapest - I don't know. But it will prove to be a very interesting era ahead.

As Uncle Ben Bernanke sits here and destroys American savers (just imagine the 65+ crowd trying to live on these CD interest rates) the master plan is to return Americans to spenders so we can kick the can down the road. But what if Americans do what is best for themselves (save) and not for the "service based economy" (spend like drunken sailors)? What happens if we don't return to 0 to 2% saving rates but seeing the increasing lack of job stability and stock market shenanigans (where many of our retirement savings are) - not to mention a country that should have anywhere from 1 in 4 to 1 in 3 people "underwater" on their homes by this time next year - turn back to our REAL "old habits"?

A 10% savings rate? Could it be possible? What would that translate to in real dollars?

We have about a $13 Trillion economy, with about $10 Trillion in private spending. (one could quibble the exact number but it's within a degree of that and $10 T makes for a nice round number). A 10% savings rate very easily translates $1 Trillion in savings. A 8% savings rate translates to $800 Billion. Even a 5% savings rate translates to $500 Billion. All these number exceed the next stimulus plan on an annual basis - which means all the government would do is borrow from our grandchildren, layer more debt on them (that we need to eventually pay) to offset money from our "old economy model" (of the past 6-8 years) as Americans, in self preservation, move to the real "old economy model" (of the past 40 years).

I don't know if this is the outcome - I am a saver by nature so I don't understand how many people live the way they do. I don't know how their "sentiment" will change or if they will repeat old mistakes in the near term. I'd like to think they would be scared straight after seeing what is happening now and a saving rate re-emerges nearer to historical norms. That would be a very healthy long term situation - but a horrible one for an economy which has been transformed to rely on spending over our heads. I do know a great many Americans are retiring (or trying to) with little to no savings - and what many had was in their homes. Which are falling in value for the first time nationally since the Great Depression. I wonder how these people will "spend" at previous rates when they will struggle just to subsist. I continue to believe that even at 0% interest rates many people, with depleted savings, simply won't want more debt at any cost; they will be too busy trying to rebuild balance sheets depleted by a decade of global forces/bad behavior. Which leads to my gloomy view of any economic recovery that rekindles images of the middle part of the decade. I don't think a Japanese style decade+ hangover is out of the question.

If I am correct, consumer discretionary items will continue to suffer far deeper and longer than the pundits and hedge fund thesis algorithms currently posit. I do not believe these pundits and PhD programmers at hedge funds understand the median wage in America is about $30K (meaning half make less). Many declaring impending recoveries probably make this wage in a month. It is 2 Americas, and the punditry does not live on Main Street. Unfortunately the non punditry portion of 2 Americas need to drive this economy. If I am correct, my bearishness for retailers (non grocery, non essential) will last much longer than those who run up said stocks on "early cycle" thesis - as they will do repeatedly in 2009 (as they have done prematurely multiple times in 2008) We are overbuilt in America - in almost everything; "right sizing" will be a long, painful process and those who dream this all gets solved in "6 months" due to easy money need to look back at our history. Remember, our country has SIX times more retail space, per capita than any other nation. If we take $800 Billion to $1 Trillion of spending (8 to 10% savings rate returns) out of the economy and into personal savings on a permanent basis - what do you think happens to a lot of that space? Will we approve 2 year, $800 Billion stimulus plans every 24 months to offset this? (kick the can forever?)

The case against me? Within 6-12 months, companies suddenly decide 6-8% wage increases are the new 3%. Or the US consumer will be back to their overspending ways and the small rebound in savings rate (2%ish) will retrace back to 0% or negative. The irony is that is not a positive outcome - it's just kicking the can of an eventually down the road. Which is what we specialize at; and our government is encouraging it.
  • The good news for retailers reeling from the holiday sales season is that 2008 is almost over. The bad news: The fallout in 2009 could be worse. This year's retailing slide -- when stores were forced to cut prices to convince wary consumers to spend -- promises to have a lasting impact on the way the retail industry operates. Many retailers are rethinking how they do business, as others prepared for a large number of bankruptcies and store closures.
  • Other retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year.
  • "We will have a lot fewer stores by the middle of 2009," says Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession." Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11.
Unfortunately we don't have great outcomes either way - it's either take the pain now and re-adjust back to the "old" consumption patterns, or kill savers who acted responsibly while force feeding debtors to take on more... so that we can have the next consumer crash down the road 3-6 years - instead of now.

Until then - we'll stay in denial talking about how things will go back to "normal" in "6 months" as the federal government saves us.

Indian Banks Perking my Interest from a Technical Viewpoint

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We haven't owned the Indian banks in a long while but both ICICI (IBN) and HDFC (HBN) are looking a lot better technically of late. If you read my piece this weekend [New York Times - How India Avoided the Crisis] on how India did some out of this world stuff like "regulate" you will see why I don't believe in the "U.S. shall lead them" thesis of recovery. A handful of countries in this world have destroyed their financial systems, and are facing a deep recession. The other countries are just facing a deep recession. Which do you believe is easier to recover from? In the U.S. it appears to be group think to believe its the former... which makes little rational sense. Its a narcissistic view in my opinion. But that's belief in the power of the "government" to solve all ills.

In the Asian banks we don't have these ludicrous capital destruction situations since they are still old school and don't have political dogma that says regulation is the bane of all evil. Now, I am not saying they will have an easy road either since the globe is interconnected, and weakness in the biggest spender on the planet (us) is affecting everyone but it's all about relative degrees of bad situations. India is also interesting to me because it's less reliant on exports than China or Brazil. So it could be the sleeper market of 2009 - at least of the former BRIC countries.

One issue with India is the almost complete lack of individual companies for Americans to buy, so over the years I've usually gone with the 2 banks when I want to go long India. (there was a closed end fund that I also used for years but some new ETNs have since arrived on the scene)

With HDB, you see a thus far successful retrace to the 50 day moving average ($65) and now a bounce today. There are two key levels here, $75 which is a "double top" (early Nov/mid Dec) - a move north of that would be very bullish and of course clearing the 200 day moving average ($79s) would be extremely constructive. So an aggressive buyer could buy on pullbacks to mid $60s with parachute ready to deploy if $63 or so breaks. A conservative investor would wait to see either $75 cleared or even better the 200 day moving average cleared.

The picture is a lot easier on IBN since the stock has been much weaker over time and is much farther below the 200 day moving average. We have the identical "multiple" top situation at $20. A close above it, and it should be off to the races. Support is around $18 and stop loss $17 or lower would be my play here.

Fundamentally I prefer HDFC to ICICI in terms of business model, but this is not a market of fundamentals.

The general country ETFs for India are not quite so constructive - the strength seems concentrated in the financials
. At some point in 2009 I'll also be looking to re-enter the ETFs for Signapore, Hong Kong and the like. But the charts have yet to indicate its time.

No positions, but stalking

Doug Kass' 20 Suprises for 2009

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As promised, presented at TheStreet.com are Doug Kass' 20 Surprises for 2009; Doug is a hedge fund manager who I have been following for a long time and who excels in non Kool Aid analysis. Probably because his main hedge fund has had a short bias all these years, hence you tend to be more cynical when you need to fight drunk bulls every day. As Doug says, Wall Street is dominated by group think and herd behavior. While standing in front of the herd is dangerous, one can find some profitable opportunities from thinking outside the box.

These are his predictions from last year [Jan 2: Doug Kass 20 Predictions for 2008]

These were mine from last year
[Dec 31, 2007: 13 Outlier 2008 Predictions] and a self assessment I did in October [Reviewing Our 13 Outlier 2008 Predictions]

Here are mine that I posted two weeks ago [Dec 16: 13 Outlier 2009 Predictions]

Unlike 2008 when Doug and I had a myriad of similar predictions this year we have a lot less in common - both of us touched on the change coming in sports and he talked about municipal budgets and a TARP fund; I said the Federal Reserve backstops all municipal debt - same ends to the means. We both are bearish on the hedge fund industry in the near term, and point to media having a very gosh awful year ahead. But other than that we are swimming in different pools for 2009 :)

****************

In late December over the past six years, I have taken a page from former Morgan Stanley strategist Byron Wien (now the chief investment strategist at Pequot Capital Management) and prepared a list of possible surprises for the coming year.

These are not intended to be predictions but rather events that have a reasonable chance of occurring despite the general perception that the odds are very long. I call these "possible improbable" events.

The real purpose of this endeavor is to consider positioning a portion of my portfolio in accordance with outlier events, with the potential for large payoffs. After all, the quality of Wall Street research has deteriorated (in some measure because of brokerage industry consolidation) and remains, more than ever, maintenance-oriented, conventional and "groupthink," even despite the mandated reforms over the past several years. Mainstream and consensus expectations are just that, and in most cases they are deeply imbedded into today's stock prices. If I succeed in at least making you think about outlier events, then the exercise has been worthwhile.

Without further ado, here is my list of 20 surprises for 2009. In doing so, we start the new year with the surprising story that ended the old year, the alleged Madoff Ponzi scheme.

    1. The Russian mafia and Russian oligarchs are found to be large investors with Madoff. During the next few weeks, a well-known CNBC investigative reporter documents that the Russian oligarchs, certain members of the Russian mafia and several Colombian drug cartel families have invested and laundered more than $2 billion in Madoff's strategy through offshore master feeders and through several fund of funds. There are several unsuccessful attempts made on Madoff and/or his family's lives. With the large Russian investments in Madoff having gone sour and in light of the subsequent acts of violence against his family, U.S./Russian relations, which already were at a low point, are threatened. Madoff's lawyers disclose that he has cancer, and his trial is delayed indefinitely as he undergoes chemotherapy.

    2. Housing stabilizes sooner than expected. President Obama, under the aegis of Larry Summers, initiates a massive and unprecedented Marshall Plan to turn the housing market around. His plan includes several unconventional measures: Among other items is a $25,000 tax credit on all home purchases as well as a large tax credit and other subsidies to the financial intermediaries that provide the mortgage loans and commitments. This, combined with a lowering in mortgage rates (and a boom in refinancing), the bankruptcy/financial restructuring of three public homebuilders (which serves to lessen new home supply) and a flip-flop in the benefits of ownership vs. the merits of renting, trigger a second-quarter 2009 improvement in national housing activity, but the rebound is uneven. While the middle market rebounds, the high-end coastal housing markets remain moribund, as they impacted adversely by the Wall Street layoffs and the carnage in the hedge fund industry.

    3. The nation's commercial real estate markets experience only a shallow pricing downturn in the first half of 2009. President Obama's broad-ranging housing legislation incorporates tax credits and other unconventional remedies directed toward nonresidential lending and borrowing. Banks become more active in office lending (as they do in residential real estate lending), and the commercial mortgage-backed securities market never experiences anything like the weakness exhibited in the 2007 to 2008 market. Office REIT shares, similar to housing-related equities, rebound dramatically, with several doubling in the new year's first six months.

    4. The U.S. economy stabilizes sooner than expected. After a decidedly weak January-to-February period (and a negative first-quarter 2009 GDP reading, which is similar to fourth-quarter 2008's black hole), the massive and creative stimulus instituted by the newly elected President begins to work. Banks begin to lend more aggressively, and lower interest rates coupled with aggressive policy serve to contribute to an unexpected refinancing boom. By March, personal consumption expenditures begin to rebound slowly from an abysmal holiday and post-holiday season as energy prices remain subdued, and a shallow recovery occurs far sooner than many expect. Second-quarter corporate profits growth comfortably beats the downbeat and consensus forecasts as inflation remains tame, commodity prices are subdued, productivity rebounds and labor costs are well under control.

    5. The U.S. stock market rises by close to 20% in the year's first half. Housing-related stocks (title insurance, home remodeling, mortgage servicers and REITs) exhibit outsized and market-leading gains during the January-to-June interval. Heavily shorted retail and financial stocks also advance smartly. The year's first-half market rise of about 20% is surprisingly orderly throughout the six-month period, as volatility moves back down to pre-2008 levels, but rising domestic interest rates, still weak European economies and a halt to China's economic growth limit the stock market's progress in the back half of the year.

    6. A second quarter "growth scare" bursts the bubble in the government bond market. The yield on the 10-year U.S. Treasury note moves steadily higher from 2.10% at year-end to over 3.50% by early fall, putting a ceiling on the first-half recovery in the U.S. stock market, which is range-bound for the remainder of the year, settling up by approximately 20% for the 12-month period ending Dec. 31, 2009. Foreign central banks, faced with worsening domestic economies, begin to shy away from U.S. Treasury auctions and continue to diversify their reserve assets. By year-end, the U.S. dollar represents less than 60% of worldwide reserve assets, down from 2008's year-end at 62% and down from 70% only five years ago. China's 2008 economic growth proves to be greatly exaggerated as unemployment surprisingly rises in early 2009 and the rate of growth in China's real GDP moves towards zero by the second quarter. Unlike more developed countries, the absence of a social safety net turns China's fiscal economic policy inward and aggressively so. Importantly, China not only is no longer a natural buyer of U.S. Treasuries but it is forced to dip into it's piggy bank of foreign reserves, adding significant upside pressure to U.S. note and bond yields.

    7. Commodities markets remain subdued. Despite an improving domestic economy, a further erosion in the Western European and Chinese economies weighs on the world's commodities markets. Gold never reaches $1,000 an ounce and trades at $500 an ounce at some point during the year. (Gold-related shares are among 2009's worst stock market performers.) The price of crude oil briefly rallies early in the year after a step up in the violence in the Middle East but trades in a broad $25 to $65 range for all of 2009 as President Obama successfully introduces aggressive and meaningful legislation aimed at reducing our reliance on imported oil. The price of gasoline briefly breaches $1.00 a gallon sometime in the year. The U.S. dollar outperforms most of the world's currencies as the U.S. regains its place as an economic and political powerhouse.

    8. Capital spending disappoints further. Despite an improving economy, large-scale capital spending projects continue to be delayed in favor of maintenance spending. Technology shares continue to lag badly, and Advanced Micro Devices (AMD Quote - Cramer on AMD - Stock Picks) files bankruptcy.

    9. The hedge fund and fund of funds industries do not recover in 2009. The Madoff fraud, poor hedge fund performance and renewed controversy regarding private equity marks (particularly among a number of high-profile colleges like Harvard and Yale) prove to be a short-term death knell to the alternative investments industry. As well, the gating of redemption requests disaffects high net worth, pension plan, endowment and University investors to both traditional hedge funds and to private equity (which suffers from a series of questionable and subjective marking of private equity deal pricings at several leading funds). Three of the 10 largest hedge funds close their doors as numerous hedge funds reduce their fee structures in order to retain investors. Faced with an increasingly uncertain investor base, several big hedge funds merge with like-sized competitors in a quickening hedge fund industry consolidation. By year-end, the number of hedge funds is down by well over 50%.

    10. Mutual fund redemptions from 2008 reverse into inflows in 2009. The mutual fund industry does not suffer the same fate as the hedge fund industry. In fact, a renaissance of interest in mutual funds (especially of a passive/indexed kind) develops. Fidelity is the largest employer of the graduating classes (May 2009) at the Wharton and Harvard Business Schools; it goes public in late 2009 in the year's largest IPO. Shares of T. Rowe Price (TROW Quote - Cramer on TROW - Stock Picks) and AllianceBernstein (AB Quote - Cramer on AB - Stock Picks) enjoy sharp price gains in the new year. Bill Miller retires from active fund management at Legg Mason (LM Quote - Cramer on LM - Stock Picks).

    11. State and municipal imbalances and deficits mushroom. The municipal bond market seizes up in the face of poor fiscal management, revenue shortfalls and rising budgets at state and local levels. Municipal bond yields spike higher. A new Municipal TARP totaling $2 trillion is introduced in the year's second half.

    12. The automakers and the UAW come to an agreement over wages. Under the pressure of late first-quarter bankruptcies, the UAW agrees to bring compensation in line with non-U.S. competitors and exchanges a reduction in retiree health care benefits for equity in the major automobile manufacturers.

    13. The new administration replaces SEC Commissioner Cox. Upon his inauguration, President Obama immediately replaces SEC Commissioner Christopher Cox with Yale professor Dr. Jeffrey Sonnenfeld. The new SEC commissioner recommends that the uptick rule be reinstated and undertakes a yearlong investigation/analysis into the impact of Ultra Bear ETFs on the market. Later in the year, the administration recommends that the SEC be abolished and folded into the Treasury Department. Dr. Sonnenfeld returns to Yale University.

    14. Large merger of equals deals multiply. Economies of scale and mergers of equals become the M&A mantras in 2009, and niche investment banking boutiques such as Evercore (EVR Quote - Cramer on EVR - Stock Picks), Lazard (LAZ Quote - Cramer on LAZ - Stock Picks) and Greenhill (GHL Quote - Cramer on GHL - Stock Picks) flourish. Goldman Sachs and Citigroup announce a merger of equals, but Goldman maintains management control of the combined entity. Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) acquires Blackstone. Disney (DIS Quote - Cramer on DIS - Stock Picks) purchases Carnival (CCL Quote - Cramer on CCL - Stock Picks). Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) acquires Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) at $5 a share.

    15. Focus shifts for several media darlings. Though continuing on CNBC, Jim "El Capitan" Cramer announces his own reality show that will air on NBC in the fall. At the time his reality show premieres, he also writes a new book, Stay Mad for Life: How to Prosper From a Buy/Hold Investment Strategy. Dr. Nouriel Roubini continues to talk depression, but the price of his speaking engagements are cut in half. He writes a new book, The New Depression: How Leverage's Long Tail Will Result in Bread Lines. "Kudlow & Company's" Larry Kudlow proclaims that it's time to harvest the "mustard seeds" of growth and, in an admission of the Democrats' growing economic successes, officially leaves the ranks of the Republican party and returns to his Democratic roots. Yale's Dr. Robert Shiller adopts a variant and positive view on housing and the economy, joining the bullish ranks, and writes a new book, The New Financial Order: Economic Opportunity in the 21st Century.

    16. The Internet becomes the tactical nuke of the digital age. The Web is invaded on many levels as governments, consumers and investors freak out. First, an act of cyberterrorism occurs that compromises the security of a major government (similar to the attacks this year emanating from the Chinese military aimed at the German Chancellery) or uses DoS against media and e-commerce sites. Second, a major data center will fail and will be far worse than the 1988 Cornell student incident that infected about 5% of the Unix boxes on the early Internet. Third, cybercrime explodes exponentially in 2008. Financial markets will be exposed to hackers using elaborate fraud schemes (such as liquidating and sweeping online brokerage accounts and shorting stocks, then employing a denial-of-service attack against the company). Fourth, Storm Trojan reappears. (Same as last year.)

    17. A handful of sports franchises file bankruptcy. Three Major League Baseball teams fail in the middle of the season and seek government bailouts in order to complete the season. The Wilpon family, victimized by Madoff, sells the New York Mets to SAC's Steve Cohen. The New York Yankees are undefeated in the 2009 season, and Madonna and A-Rod have a child together (out of wedlock).

    18. The Fox Business Network closes. Racked by large losses, Rupert Murdoch abandons the Fox Business Network. CNBC rehires several prior employees and expands its programming into complete weekend coverage. Two popular CNBC commentators "go mainstream" and become regulars on NBC news programs.

    19. Old, leveraged media implode. The worlds of leverage and old media collide in a massive flameout of previous leveraged deals. Univision and Clear Channel go bankrupt. The New York Times (NYT Quote - Cramer on NYT - Stock Picks) teeters financially.

    20. The Middle East's infrastructure build-out is abruptly halted owing to "market conditions." Lower oil prices, weakening European economies and a broad overexpansion wreak havoc with the Middle East's markets and economies.


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